How often have we heard Joe Public lament that “Back in …. (insert year ) , such a product used to cost only … (insert a cheaper price )” ? reminiscing that prices are more expensive now than it was before.
Is this perception of how prices seem drastically higher now – a fair perception ? Is there negativity bias at play ?
In my exploration, I suggest that perhaps we are now more well off than we have been before.
In the latter half of this post, we reflect on what the evolution of prices over time- teaches us about pricing strategy and considerations.
Have prices increased drastically over time- such that it is out of step with our income ?
To answer the question,We examine a few examples of the price of goods, relative to our weekly average income
1.The price of petrol used to be $0.749 / litre in 1998 and is now at $140.4 / litre, more than double in absolute terms ! However, the percentage of our weekly wage that we have spent on petrol over time has largely been unchanged at 7-8 % (Table 1).
2.Table 2 – putting aside the technology update and how much more ‘standard’ equipment one gets when purchasing cars now (remember free air?) – ~10 years ago it took an average of 41.3 weeks of wages to pay off a Holden Commodore, now it takes 31.2 weeks; same for a higher end car with a BMW 320i taking an average of 71.7 weeks to pay off before, vs 54.1 weeks now.
3.This ad from 1989-enough said !
Thomson (2012) observes many other examples such as toasters, alcohol,suits, a Bali holiday – all of which the true prices relative to our income has decreased over a 30-50 year horizon.
To be fair,the only area where Joe Public’s lament is validated is in housing – this ABS report shows that housing debt as a % to disposable income was 114% in 2005, and is now 142%.
Sorry Mr Joe Public, in general you do not have a reason to complain!
With the exception of housing, there are many examples of where prices of goods relative to our income has reduced over time.
Thus we now enjoy much better purchasing power, compared to our forefathers.
What does the downward evolution of prices mean for marketing pricing considerations ?
I would argue that the product lifecyle and the 5 Cs -Competitor and Context weighs heavily on pricing considerations, that price setting does not necessarily start at step # 1 below.
Product Lifecycle & Competition
Over time, prices are set by the market: There are times where firms need to start at # 6 and go backwards.
Eg for a basic toaster – as consumers we have been conditioned (Context) that a basic toaster has a heuristic value of ~$20-$30. So for a firm # 6 is a ‘given’ and #4 is well understood, so the only other way to sharpen profits is to reduce costs ie #3.
I would argue that this is true for mature and commodity (highly competitive) products… but what about ‘fast’ fashion ?
John Oliver has an excellent take of the price of ‘fast’ fashion- the $4.95 H&M dress @ 2.22 minutes . Are we conditioning ourselves with cheap prices for clothes going forward ? If so , he also questions the ethical implications of how it can be made so cheaply.
Contrast with a launch product or where there is no competition, the firm could go from # 3 to #6 straightaway- such as Giliead’s Hepatitis C treatment at USD 84,000 which cures 90% of the patients with little side effects (compared to the previous standard of care). Moral judgements aside, when the product is THAT good, your pricing strategy is easier !
Price setting is an iterative process and is never linear
– finished at # 6 ? Go back to #4,wash,rinse, repeat ! This is because the 5Cs are constantly evolving over time.
The Commodore and BMW 320i (Table 2) above as an example- not only has the product attributes changed, bigger changes have also taken place in ‘Context’ and ‘Competition’ – reduced import tariffs, greater consumer affluence, greater fragmentation of the car market than ever before; we see that over time there is an ever present ‘external’ pressure on prices. Thus #1 is less of a consideration,compared to #4. I would argue that it is one of the reasons why the relative prices of the 2 cars have reduced over time.
Price setting is not a sequential process, rather is an iterative process- firms have to be cognisant of #4 or # 6 and at times, are forced to work backwards from a given ‘price point’.
Firms need to constantly review the pricing strategy in light of the ever changing Cs in Competition,Context and Company capabilities (efficiency to reduce cots).
Over time this manifests as lower prices-and that is one of the reasons why I believe we see the trend of lower prices of physical goods, as a % of our total consumption over the long run. (See Diagram 1 below)-
Lastly, Mr Joe Public is wrong when it comes to the price of most goods- it is relatively cheaper now than it ever was.
• Beech A, Dollman R, Finlay R, La Cava G, 2014 The Distribution of Australia Household spending in Australia ,Accessed 28 April 2016
• Palmer E 2015, Gilead considered $115K price for Sovaldi, Senate investigation says Accessed 28 April 2016
• Sadeghi-Nejad N 2014 Sovaldi And The Cost-Innovation Paradox , Accessed 28 April 2016
• Spinks J,2014 End of Australian-made cars what happened and what it means, Accessed 28 April 2016
•Thomson J 2012 How everything but housing has become more affordable in the last 50 years ,Accessed 28 April 2016
• Australia Weekly Wages from Trading Economics, Accessed 28 April 2016
• Australian Bureau of Statistics, The Australian Residential Property Market, Accessed 28 April 2016
• Image accessed on 28 April 2016